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ASBESTOS and

VIEWS: 12 PAGES: 6

									  environmental law society                                                                                                        V7, N2           April 1983

                                                                                                                                         assets, Manville achieved a net
                                                                                                                                         income in the third quarter of 1982


  ASBESTOS and                                                                                                                           of S25 million, after filing for ban-
                                                                                                                                         kruptcy earlier that year. Soon
                                                                                                                                        after filing for bankruptcy, the
                                                                                                                                         Manville Corporation launched an
                                                                                                                                        ad campaign proclaiming "Manvill's


 BANKRU PTCY                                                                                                                            new world is full of promise."
                                                                                                                                               Under bankruptcy procedure,
                                                                                                                                        the Federal Bankruptcy Court is
                                                                                                                                        placed in control of all claims and


      a troublesome                                                                                                                     suits against the debtor, no matter
                                                                                                                                        where      a    claim       originates.
                                                                                                                                        Presently, the 1978 Bankruptcy
                                                                                                                                        Reform Act is being reconsidered


         chemistry                                                                                                                      by Congress due to the U.S.
                                                                                                                                        Supreme Court's decision that the
                                                                                                                                        Act delegates an unconstitutional
                                                                                                                                       amount of power to federal ban-
                                                                                                                                       kruptcy judges. (Northern Pipeline.
                                                                                                                                       50 U.S.LW. 4892 (1982).) Asbes-
                                                                                                                                       tos claimant's are an unsecured
       On August 26, 1982, the Manville Corporation filed for bankruptcy under
                                                                                                Manville files under the               class of-creditors within the ban-
 Chapter II of the Bankruptcy Code. The corporation was not insolvent (it                                                              kruptcy priority system and are
 actually reported over $60 million in profits in 1981), but was faced with                        Bankruptcy Act
                                                                                                                                       represented     by a committee.
 thousands of present and potential lawsuits asking compensation for asbestos-                                                         Manville's reorganization plan will
 related diseases. Manville determined that the total cost of these future                      According to a recent study            be required to provide for asbestos
 lawsuits would be about $1.2 billion. Two other major asbestos producers,                which Manville commissioned,                claimants as well as all other credi-
 UNR and Amatex, have also filed under the Bankruptcy Act in response to an               there will be 32,000 lawsuits filed         tors.     For example, companies
 overwhelming volume of asbestos litigation.                                              against the Corporation during the          which supply Manville with pro-
       It is a difficult problem to set up an equitable program of compensation           next 20 years, resulting in over            ducts who have outstanding
for injured individuals where one of the principally responsible corporations             $1.2 billion in future liabilities for      unsecured claims now have the
predicts that its assets will not cover its potential liabilities. From a more criti-     the company. This future liability          same creditor status as asbestos
cal perspective, the problem is: should a corporation with over S2 billion in            is no doubt speculative and perhaps         claimants. If Manville were to
assets and over $1 billion in net worth, including 1981 profits of over $60 mil-         inflated. The study's estimates              liquidate its assets instead of reor-
lion, be able to use bankruptcy to delay and possibly reduce its obligation to pay       were based on an average cost per            ganizing them, most if not all of
damages to asbestos plaintiffs?                                                          case of $40,000, while many cases            the prsent asbestos claims would
                                                                                         in 1982 have cost Manville only             be paid. But Manville contends
                      I           Background         :                                   S16,000. In addition, the total cost        that no money would ever reach
       The Manville Corporation, formerly the Johns-Manville Corporation, is             of the suits over the next 30 years         future claimants unable to sue now.
the largest producer of asbestos in the world. Asbestos is a mineral fiber used          has not been reduced to a present           This is why alternative legislative
widely in industrial and construction projects because of its durability, its ability    value figure. At a discount rate of         solutions, to be discussed later in
to insulate, and its resistance to fire.                                                 8%, for example, Manville's esti-           this article, are important con-
                                                                                         mate of $1.2 billion in liabilities         siderations when thinking about
       Asbestos fibers, which can be easily inhaled, m:ere first recognized as a
                                                                                         over the next 30 years has a                compensation for all asbestos vic-
cause of lung disease in 1927. Nevertheless, its use continued through the               present value of about S500 mil-
1970's, partly because of its beneficial qualities and partly due to an alleged                                                      tims. The Chapter 11 filing may
                                                                                         lion. From an economic stand-               give certain advantages to these
cover-up within the industry. Evidence has been introduced in cases for dam-
                                                                                         point, this is the more relevant            future claimants.
ages against Manville that the corporation knew of the dangers of asbestos 30-
                                                                                         figure, but Manville's estimate was                 Manville's petition for reor-
40 years ago, but that it did not publicize the results or warn employees. Man-
ville still disclaims having such knowledge.                                             reached by multiplying the total           ganization may permit consolidation
                                                                                         number of estimated suits by a flat        of the thousands of asbestos claims
                                                                                        expected cost per suit. The esti-           pending in different states. Conso-
      Three of the predominant                 500 new lawsuits being filed every
                                                                                        mate of total future liability does         lidation of the claims should make
asbestos-caused diseases are asbes-            month. Manville's estimated liabil-
                                                                                        not account a for a likely decrease         it less costly for Manville to defend
tosis, mesothelioma, and lung                  ity from suits already filed is $660
                                                                                        in Manville's defense costs due to          itself, ostensibly resulting in more
cancer, all of which have a long               million. Although Manville's aver-       increased efficiency through repeti-
latency period. Between 1940 and               age settlement cost in these suits is                                                money for all creditors. By halting
                                                                                        tion, or through the possible conso-        the present asbestos suits, money
 1979, more than 27 million Ameri-             $40,000, it has in some cases been
                                                                                        lidation of suits by the bankruptcy         can be saved and a plan devised so
cans were exposed to the asbestos,            found liable for punitive damages         courts. Yet Manville used this              that all asbestos victims, present
many as a result of working in                of as much as $600,000.                   study in predicting future financial
naval shipyards during World War                     In Johns-Mansville Corpora                                                     and future, will be compensated to
                                                                                        insolvency, despite its present S1          some degree. It is also true, how-
II, where asbestos was widely used            tion v. Superior Court , 27 Cal.3d        billion in net worth. It should be
in construction. According to a                                                                                                     ever, that numerous suits approach-
                                              465 (1980), the California Supreme        noted, however, that the estimated
1964 study by Dr. Irving Selikoff of          Court held that although an                                                           ing settlement were suddenly
                                                                                        future liability was not adjusted for       stopped by the filing of bankruptcy.
Mt. Sinai Hospital in New York,               employee's compensatory damages           inflation.
235,000 deaths will occur between             for asbestos related injuries are                                                     In one well publicized case, a dying
1982 and 2027 as a result of asbes-                                                            As a result of this prediction       man was deprived of his compensa-
                                              usually     limited   by    Worker's
                                                                                        of insolvency, Manville filed for           tion checks which had already been
tos exposure. Every year, between            Compensation law, Manville was
8,500 and 10,000 cancer deaths are                                                      protection from creditors and               promised him by Manville.
                                             liable for punitive damages because        claimants under Chapter 11 of the
related to asbestos, according to the        of the corporation's knowledge and
study.                                                                                  Bankruptcy Reform Act (11 U.S.C.
                                             concealment of the dangers of              § 301). While Chapter 11 usually
      To date, claimants have filed          asbestos.                                  concerns "reorganization'        of a
16,500 asbestos-related lawsuits                                                        faltering and insolvent debtor's
against Manville, with an estimated                                                                                                                   (Ste ASBESTOS, page 2)




                                           .Environmental  LawSociety                                                                                 NNRFTOG
                                                                                                                                                      NONPROFIT ORG.
                                             School Law
                                                   of
                                                ersity ofCalifonia
                                             UnhU                                                                                                      U.S. POSTAGE
                                                  Califoma 95616
                                             Davis,                                                                                                         PAID

                                                                                                                                                        Davis, Calif.
                                                                                                                                                        Permit No.3
   2                                                                                          +niAHK~nM                                               NV_


                                                   cases involving almost 13,000 indi-
   Asbestos
   (continued from front page)
                                                   vidual claims. The government has
                                                                                                 which prevent recovery for diseases
                                                                                                 with long latency periods such as
                                                   argued that there was adequate sur-          those caused by asbestos. Further-
                                                   veillance of the shipyards and that          more, payments under these pro-
           Many     of   the attorneys             health standards were upheld.                grams are often inadequate because
    representing plaintiffs in asbestos           Officials also claim that the govern-         compensation is based on 1940
    litigation contend that Manville in            ment is already helping to compen-           wage scales. Hart's bill calls for a
    fact filed for reorganization to              sate asbestos victims through Social          plan of reform to correct these
    defraud plaintiffs. They claim that           Security Disability, Medicare, con-           inadequacies.
    now that bankruptcy has been filed,           tributions to state worker compen-
    present asbestos plaintiffs will              sation funds, and through other
   receive less from Manville than                programs such as veterans benefits            S           Conclusions              [
    they would have through individual            and benefits given under the
   litigation. The committee of asbes-            Federal Employment Compensation
   tos claimants has filed a motion in            Act.                                                  Neither a final compensation       our
   bankruptcy court arguing that                                                                  plan nor a Chapter 11 reorganiza-
   Manville's petition was filed in "bad
   faith", and should be dismissed. As                  Legislativ    teatives
                                                                                                  tion plan for the Manville Corpora-
                                                                                                  tion has been agreed upon at this
                                                                                                                                           MONEYTREE
   of this writing, this motion has not                                                           date. The asbestos industry wants        is part of an extinct
   been ruled upon. If this motion is                                                            government participation in a plan
                                                            One piece of legislation intro-       to compensate asbestos victims; the
                                                                                                                                           species...in spite of our
   unsuccessful, Manville can be
   expected to propose a long-term                    duced to aid asbestos victims does          government opposes it. Unions            environmental efforts...so
   plan of restructuring for the cor-                 not require government contribu-           oppose any limitations on liability       we turn to you, our
   poration and its debt. How present                 tions to a general fund. Represen-         suits which a general fund or a           readers, with this plea for
  and future asbestos claims will be                  tative George Miller (D-Calif.)            revised worker compensation pro-          support...
  accommodated in this plan is unc-                  sponsored a bill (HR 5735) in 1982          gram might create. Victims oppose
  ertain. Furthermore, it is unclear                  that would require only asbestos           limitations on compensatory dam-
  whether an economically healthy                    manufacturers and suppliers to set          ages, and it is unclear what causes
  corporation like Manville needs to                 up a compensation fund. Accord-             of action a dead victim's surviving      PLEASE SUBSCRIBE
  restructure at all. Manville (and                  ing to Miller, requiring the govern-        family members might have under          TO ENVIRONS AND
  the entire asbestos industry) along                ment to contribute to the compen-           the different alternatives in seeking
                                                     sation fund "would establish a
                                                                                                                                          ASSIST OUR
  with Congress, has recognized the                                                             compensation. Furthermore, none
  need to consider alternative solu-                 dangerous precedent which could            of the proposed bills has been rein-      CONTINUING EFFORT
  tions to the problem of equitably                 open the door of the Treasury to            troduced into the new Congress; a         FOR SUSTENANCE
  compensating asbestos victims.                    every manufacturer of a hazardous           new push will be needed to con-
                                                    product or substance which finds            tinue discussion for a legislative
                                                    itself confronted with admittedly           solution to emerge.                       Please fill out the form below
           Industry Solutions              I        large liabilities ... which are of its             Beyond the immediate dispute       and mail to:
         to Asbestos Litigation                     own making." Miller claims the             involving Manville lies a broader
                                                    taxpayers are already spending over                                                      Environmental Law Society
                                                                                               policy question of how to avoid
                                                    S3 billion a year to compensate vic-                                                     UC Davis School of Law
                                                                                               similar situations in the future.
         Manville would like to see                 tims through other government                                                            Davis, California 95616
                                                                                               The alternatives offered will allow
   established a "no-fault" system of              programs, and he believes govern-           claimants to escape the burden of
  compensation in which industry                   ment contributions to an asbestos-          long and expensive individual litiga-
   members and the federal govern-                 compensation fund would be a                tion in seeking compensation. Indi-        Please make checks payable to:
   ment would contribute to a general              bailout for the asbestos industry.          vidual litigation of asbestos cases        ELS/Environs
  compensation fund. This fund                             An alternative piece of legisla-    has had the beneficial effect of
  would be used to pay claimants                   tion, S. 1643 sponsored by Senator          bringing to light the information
   directly, instead of each claim being           Gary Hart (D-Colo.), does specify           concerning         Manville's     early
                                                  government participation. This bill                                                     NAME:
  litigated separately as Manville has                                                         knowledge of asbestos' dangers and
  done in the past. The fund would                calls for establishing a commission          in some cases has resulted in             ADDRESS:
  provide the asbestos industry with a            of government, health, labor, and            Manville being held accountable
  collective and finite compensation              industry representatives who would           accordingly.
  program through which asbestos                  develop criteria for state worker                   As more and more toxic sub-
  damage claims could be paid. Man-               compensation boards. The criteria            stances enter the workplace and
  ville president John A. McKinley                would be used to determine pay-              environment, there is an increasing
  stated, "[The adequacy of asbestos              ments to victims by assessing each           danger that the industries involved
  compensation] is not a financial                participant's responsibility through         will seek refuge in bankruptcy to
  failure. It is a failure of our court          a complicated arbitrator's formula.           delay and possibly avoid compen-          AMOUNT ENCLOSED:
  and legislative system to compen-              Since each party would be required            sating their victims. The Manville        o S 5.00 -Bread & Water
  sate victims of an unexpected occu-            to pay its respective share, Hart            Corporation's use of bankruptcy            o S10.00-Soup & Sandwiches
  pational health catastrophe." This             claims his legislation is not a              towards this end brings into ques-         r S15.00 -Three mealsa day
  fund would compensate most, if                 bailout bill. The key issue, says            tion the proper use and purpose of
                                                 Hart, "[ils, and always has been,                                                       o $25.00 - Gourmet Delight
  not all, of the victims. Prior to                                                           the bankruptcy law. Changes in             o S....._ - Friend of Environs
  bankruptcy, Manville won about                 not what is good for the asbestos            bankruptcy, tort, and workman's                  (any amount appreciated)
  half of the suits against it, usually          industry . . . but what is necessary         compensation laws may be required
  because the claimants could not                to insure that workers disabled              to make certain that victims receive        Any subscription donation
 prove a causal link between asbes-             from asbestos-related diseases are            prompt and fair compensation,               given wilt insure your receipt of
 tos and their illness. With the                fairly compensated by the parties             without permitting wrongdoers to           all issues of Environs published
 fund, this would not happen. How-              responsible." According to Hart,              escape their responsibility through        this year.
 ever, the compensation from the                this plan would force Manville to             bankruptcy laws or otherwise.               Is there some onelorganization
 fund might not equal what a jury               take responsibility for the alleged
                                                                                                                                         that might benefit from
 award would have been after indivi-            cover-up of the asbestos problem                                                         receiving Environs? Please send
 dual litigation. Manville views this           30-40 years ago, and would provide                                                       us their name/address too.
as a desirable way to limit its liabil-         for federal contributions because of
 ity.                                           the federal government's status as             Norine Marks,
                                                                                                                                         NAME
        The      federal   government           an employer controlling work pro-             Adam Rosen
claims there is no basis for requir-           jects where asbestos was used                                                             ADDRESS:
ing government participation in                 extensively.
such a compensation program since                         One of the main policy rea-
its liability for workers' injuries has        sons behind Hart's bill is what he
not been established. Because of               perceives as the inadequacy of state
the many victims who were                      worker compensation programs and
exposed in the military shipyards              the need for their reform. Those
during World War II, the govern-               programs tend to contain artificial
ment has been sued as a co-                    barriers to compensation such as
defendant in about 1,200 asbestos              impractical statutes of limitations
       (nhKVA  m       i   I     I   I    I    I       I   I    I
                                                                    Io hLS   n       I    m     --   L
                                                                                                                                                                  3             I




                                                                                                                                             The Implementation of the
                                                                                                                                            Asset Management Program

                                                                                                                                               Some administration officials
                                                                                                                                         have expressed concern that the
                                                                                                                                         executive branch lacks the capacity
                                                                                                                                         to implement the President's pro-
                                                                                                                                         gram.     A recent Congressional
                                                                                                                                         Budget Office (CBO) study esti-
                                                                                                                                         mates that the administration will
                                                                                                                                         fall $4.75 billion short of its 1983-
                                                                                                                                         85 goal for land sales revenues of
                                                                                                                                         $9.25 billion. The CBO predicts
                                                                                                                                         that in 1983 alone, the administra-
        On    February 25,      1982,              BLM lands could be sold for                   of certain federal lands to be used     tion will fall S900 million short of
  President Reagan signed Executive                approximately S2.5 billion. Overall,          for state and federal aquisition of     its $1.25 goal. The CBO doubts
 Order 12348 to create the Federal                 more than 307 parcels of what is              land for parks, recreation areas,       that the General Services Adminis-
 Asset Management Program. The                     deemed "unneeded federal pro-                wildlife refuges or other public        tration (GSA), which is responsible
 program's purpose is to identify                  perty", totalling over 60,000 acres,          uses. Thus, existing laws may          for processing all federal land sales,
 federally owned land that is "excess              are included in a list recently pub-          prevent the funds raised from land     will be able to handle large
 or surplus" to the needs of execu-                lished by PRB Chairman Harper.               sales from going into the general       increases in its workload. In fiscal
 tive agencies so that this property               Land offered for sale includes 17             fund to reduce budget deficits.         1982 the GSA's 123 member staff
 can be put to its "most beneficial                acres of Waikiki beach front owned                  Congress' response to the        coordinated the sale of almost S135
 use." One such use is to sell these               by the U.S. Army and valued at                Asset Management Program has           million of federal property. The
 properties to raise revenue. The                  $221 million; the now vacant five-           been mixed. Senator Charles H.          administration plans a nine-fold
 Reagan administration estimates                   story New York Assay Office on               Percy and Representative Larry          increase in land sales during fiscal
 that 5% of the 744 million acres of               Wall Street estimated to be worth            Winn, Jr., have introduced bills        1983, but has not even doubled the
 federally owned land, approxi-                    $8.3 million; and the 33 acre Point           (S.R. 231, H.R. 265) in support of     GSA's real estate staff. Further-
 mately 35 million acres, could be                 Sur Light Station in Big Sur, Cali-          the program. These resolutions          more, in the past it has taken the
 sold during the next five years to

                                                               &~2ZijZj~>
 raise over $18.3 billion.


    The Property Review Board
         and Terms of Sale


        Executive Order 12348 esta-
  blished a Property Review Board
  (PRB) chaired by Edwin L. Harper,
  Assistant to the President for Policy
  Development.        Other      Board
  members include presidential aides
  Edwin Meese Ill and James A.
  Baker Ill, and National Security
  Advisor William P. Clark. The
  Order requires the head of each
  executive agency to inventory all
 .property holdings which . . . are
  not utilized, are underutilized, or
 are not being put to good use."
  Each inventory is to be sent to the         fornia, for which no value has been                urge the President to submit legis-    GSA an average of 18 months to
 PRB, which will help agencies sell           determined.                                       lation to stream-line current public    sell a parcel of surplus property.
                                                                                                land laws. The bills also specify       The Administration plans to quin-
 the identified holdings. Properties
 would be offered first to other                                                                that the proceeds from land sales       tuple the GSA's workload while
 federal agencies, then to state and               Federal Law and the Disposition              go only to reduce the national debt.    cutting its processing time by a
 local governments, and finally to                         of Federal Lands                     Congress has not acted on these         third. Even if this were possible, it
 private entities and citizens. State                                                           proposals because the administra-       would seem difficult at best to
 and local governments must pay                                                                 tion is expected to submit its own     maintain the GSA's program qual-
                                                      Executive     Order      12348
 market value for these lands unless            emphasizes that the PRB's role in               measure soon.                          ity standards.
 they can demonstrate that a lower              the Asset Management Program is                       Many Washington observers
selling price is in the public                 only to resolve conflicts over the              doubt that Congress will give the
                                                                                                                                       [ The President's Supporters
interest. Private purchasers must              alternative uses to which the lands             President the support needed to
also pay market value.                         could be put in accordance with the             make asset management a success.
                                               federal law. However, existing land             Many Congressional representatives              Despite widespread doubts
                                               management policies and laws clash              fear that lands will simply be sold
          Land for
                 Sale                                                                                                                    that the Asset Management Pro-
                                               sharply with the President's pro-               to the highest bidder, with little
                                                                                                                                        gram can significantly ease budget-
                                               gram. On February 9, 1982, more                consideration     for    the public       ing strains, the program does have
      To date, executive agencies              than two weeks before the                      interest.    Governors of many
                                                                                                                                        the support of many high-level
have identified numerous parcels of            President signed Executive Order               western states fear that land sales
                                                                                                                                        officials. Secretary of the Interior
surplus land. On May 18, 1982,                 12348, the Cabinet Council on                  could result in new absentee land-
                                                                                                                                        James Watt recently stated that he
the U.S. Forest Service announced              Economic Affairs issued a report               lords, perhaps foreign ones.
                                                                                                                                        could think of no "better way to
that 54 tracts of surplus land total-          warning the President that *current                    Even if the administration        raise some of the revenues so badly
ing 42,730 acres would be offered              statutes and regulations . . . make            succeeds in getting land sale            needed than by selling some of the
for sale. These tracts include the             commercial sales of federal lands              proceeds     funneled     into    the     land and buildings no longer
San Gabrial Canyon in Azusa, Cali-             difficult if not practically impossi-           Treasury, the Federal Land Policy        needed." Nevada Senator and
fornia, and the White Deer                     ble." President Reagan wants to                 Management Act (FLPMA) of               presidential confident Paul Laxalt
Administration Site in Dunlap, Cal-           sell lands to help balance the                   1976 significantly restricts the sale   would like to see the BLM's 155
ifornia. Most of the identified               federal budget, but the Reclamation              of federal lands. FLPMA requires         million acres of grazing land sold to
surplus lands are administered by             Act of 1902 requires proceeds from               Congressional      approval,      for   those who use these lands, i.e. large
the Bureau of Land Management                 the sale of any western lands to go             instance, before any parcel larger       ranchers. Laxalt argues that "some
(BLM) and are located in the six-             to the reclamation fund for use in              than 2500 acres is sold. FLPMA           form of privatization would benefit
teen western states. On June 17,              building irrigation projects. The               does not, however, totally prevent       all of us."
the Interior Department released its          Land and Water Conservation Act                 officials from selling excess or
estimate that 4.3 million acres of            of 1964 directs funds from the sale             surplus lands.                                      (See PUBLIC LANDS, pae4)
                                   4Nb
                                                                                     small
                                            people." It does in fact seem likely
  Selling the                               that if large amounts of land were
                                            suddenly to be put up for sale, the
  Public Lands
                                                                                     ROWER IN
                                            price received for the parcels would
                                            be far below their true values.
  (continued from page 3)



          Some see the land sales as
   more of a philosophical than a
   budgetary issue. Economist Steven
                                                       Conclusions        X1

                                                  During the middle of this
                                                                                     DEVELOPMENT
   H. Hanke of John Hopkins Univer-
   sity believes that *private property
   is always more productive than
                                           century, American policy makers
                                           reversed the country's policy of
                                           public land disposal after realizing
                                                                                    CALIFORNIA
   public property." Hanke disagrees       that tremendous abuses of that pol-             In the last Issue of Environs ,           significant incentives for private
  with supporters of the 'Sagebrush        icy were taking place, and that          Jim Laughlin described the potential             investors to develop small power
   Rebellion', who advocate increased      future generations' access to many        for wind power development in Cali-            facilities.   Before PURPA was
   efficiency through the transfer of      public amenities and resources was        fornia. Wind power, ind other small             enacted, most utilities paid small
  federal lands to state governments.      being mortgaged away. Fifty years        power technologies, are increasingly            power producers meager sums, it
  Hanke argues that the only way to        later, the Reagan Administration's       attractive alternatives to central sta-         anything at all, for power supplies.
  improve the productivity and                                                      tion power production from the stand-           Furthermore, potential developers
                                           Asset Management Program might
  efficiency of public lands is to                                                  point of investors and electricity
                                           seem like a reasonable method to         users.
                                                                                                                                    blamed the prospect of being regu-
  privatize them. Curtis M. Miller,        help balance the budget. But since                                                       lated as public utilities as a major
  agricultural consultant to the Cali-     the program significantly changes               In order to optimize small power         cause of the slow development of
  fornia Agriculture and Water                                                       development, state and federal policy
                                           federal land management policy, it                                                       commercial alternative energy sys-
  Resource Committee, complains                                                      makers have created rules governing
                                           raises      important    questions.       the basic price and other contract pro-        tems. To correct this roadblock.
  that the lack of an incentive on the                                                                                              the provisions of PURPA exempt
                                                                                     visions to be offered by regulated utili-
  part of federal land managers to                                                   ties to independent small power pro-           certain "qualifying facilities" (QFs)
  turn a profit causes federal agencies                                             ducers. California regulators have             from utility status for the purpose
  to 'engage in some of the most                                                    adopted various rules which seek to            of state and federal regulation. It
  wasteful and destructive practices                                                ensure the existence of a market for           requires regulated utilities to pur-
 imaginable."                                                                       electricity produced by alternative            chase QF power and to pay a price
                                                                                    energy technologies. In large part,            up to the utilities' 'avoided costs."
                                                                                    the ability of developers to finance           that is, the cost which the utility
                                                                                    small power projects will determine            would otherwise incur to produce
          Opponents of the                                                          the extent of such development in the
         President's Program                                                                                                       or acquire that power.
                                                                                    state. This article presents a sum-
                                                                                    mary of public policy affecting the                    Notwithstanding such incen-
                                                                                    financing opportunities of potential           tives, the difficulties of acquiring
          Many doubt the President's                                                developers.                                   adequate financing impede private
   program can work even if legal and                                                      The author, Kim Malcolm, is an         investment in small power facilities.
   budgetary hurdles are overcome.                                                  analyst for the California Public Util-       A weak national economy and the
   Nevada Senator Dean A. Rhoades                                                    ities Commission (CPUC), and holds           financial risks associated with new
   disagrees with Senator Laxalt and                                                the position of Advisor to CPUC Com-          energy technologies create an
                                                                                    missioner Priscilla Grew. Ms. Mal-            unfavorable climate for otherwise
   feels that ranchers don't want to                                                colm has a Master's degree from the
   buy land on which they would have                                                                                              economically viable investments.
                                           Congress must decide whether or          Graduate School of Public Policy of
   to pay taxes. He says they would         not to initiate a policy of selling     the University of California at Berke-                Under PURPA, federal law
   rather secure long-term grazing         public lands to reduce the national      ley. The views expressed in this arti-        permits state authorities to imple-
   rights. Lonnie Williamson, Secre-       debt. The Administration may             cle are those of the author and not           ment policies which would help
   tary of the Wilderness Institute in     have to ignore its budget cutting        necessarily those of the CPUC or its          developers acquire financing. In
   Washington, doubts that ranchers        stance by increasing the GSA's           staff.                                        California, the Public Utilities
  can afford to purchase federal           budget to insure that that office,                                                     Commission (PUC) is responsible
   lands. She says, "there are not two     which must process land sales, is                                                      for establishing such policies by its
  dozen livestock operations in the        adequately staffed. Western state                                                      implementation of contracting prin-
  whole country that can afford to        and local governments seem unwil-                                                       ciples which apply to the state's
  buy the land they graze on."             ling to support a program which                                                        utilities. This article discusses QF
         Historically, private manage-     transfers federal property from pub-                                                   financing and how the PUC's
  ment of what had been public            lic to private ownership. Real                                                          adopted policies may affect small
  domain has often resulted in            estate purchasers may not respond                                                       power development in the state.
  despoilment rather than increased       enthusiastically to those lands the
  productivity. Such waste prompted       federal government offers for sale.
  Congress to pass the Taylor Graz-       The public must decide which lands                                                            Financing Small Power
  ing Act of 1934, the Wilderness         to sell and when to sell them;                                                                     Development
  Act of 1964, and the Federal Land       prices will most certainly be lower
  Policy and Management Act of            in today's real estate market than
  1976. Federal land management           they would be in a strong market.                                                             The value of small power
 policy has gradually evolved from a      These issues need to be resolved                                                        technologies has become more
 policy of disposal to one of conser-     before any program of asset                                                             obvious as the cost of conventional
 vation and preservation. Privatiza-      management should be allowed to                                                         power generation has increased.
 tion ignores past policy and returns     proceed.                                                                               The California Energy Commission
 to an older system of management.                                                                                                reports that by 1985, alternative
         These considerations aside,                                                                                              technologies will have lower costs
 many feel that 'asset management'                                                                                               of supply       than conventional
                                                                                                                                 options. ( See California Energy
 is not the proper way to reduce
 budget deficits. Nevada Represen-                                                                                               Commission, Service Corporations:
tative James D. Santini says privati-      Allen Ginsborg                                                                        Opportunities for California Utili-
zation misses the boat. He argues                                                                                                ties, November 1980). This long-
that the proceeds from federal land                                                                                              term advantage, however, may not
sales should be put in a trust fund                                                                                              be enough to convince lenders to
to meet the environmental and                                                                                                    back small power projects.
recreational needs of the future. A                                                                                                    High interest rates discourage
recent Los Angeles Times editorial                                                                                               new investments. Small power pro-
characterized the Asset Manage-                                                                                                  duction is especially expensive
ment Program as "a fire sale that                                                                                                because lenders often require large
will . . . burn Americans for gen-                                                                                               equity contributions to cover the
erations to come." The Wilderness                                                              Introduction                      high initial costs associated with
Society sees the program as nothing                                                      The Public Utilities Regula-            small power technologies. Small
more than "an outright piracy of                                                   tory Policies Act (16 U.S.C. §                power developers, however, fre-
                                                                                   82
lands that belong to the American                                                     4a-3 et seq. ) of 1978 created                         (See SMALL POWER, page5j
                                                  f                     hY,
                                                                        K
                                                                      -No
                                                                                                                                                                      I




                         ~TiK,


                                          development.       Shortly    before             plies which are based on
 Small Power                              PURPA was enacted at the federal                 projected avoided energy
                                                                                           costs at the time the obli-
                                                                                                                            The Gospel According to OIR 2
 (-otnLed from    c
                 pa 4)                    level, the PUC adopted similar poli-
                                          cies to encourage development at                 gation is incurred. These             In establishing contract terms
                                          the state level. In a 1978 decision,             energy prices are based on      for QFs, regulators have to balance
 quently have little or no indepen-                                                        forecasts      and     are      many competing interests and
 dent financial strength.                 the Commission ordered the state's
                                          utilities to pay small power produc-             guaranteed for up to five       evaluate numerous alternatives
                                         ers avoided costs for purchased                   years.                          using a number of guidelines. The
        In addition, small power tech-                                                                                     goals of the contracting process are
                                          power. The decision also discussed
  nologies such as wind and waste-                                                    3.   Firm Capacity Contract. A       to:
                                          the benefits which occur as a result
  to-energy are relatively new and are                                                     QF providing the utility
                                         of the development of alternative
  thus considered to be high risk ven-                                                     with firm capacity may                     Encourage       development
                                         power sources such as resource                                                        1.
  tures. Even technologies that have                                                       receive a higher capacity                          economical         small
                                         diversification, increased indepen-                                                          of
 been tested and that are considered                                                       payment than that offered                                               The
                                         dence from foreign fuel sources,                                                             power       facilities.
  more reliable, such as cogeneration,                                                     under an as-available con-
                                         and the shorter lead time required                                                           intent of avoided cost
  may seem risky to investors                                                              tract. To qualify, the QFs
                                         for the construction of generating                                                           pricing policy is to pro-
 because of regulatory uncertainty.                                                        must meet certain power
                                         facilities.                                                                                  mote      those        facilities
 Lenders will not absorb the risk                                                          generation   performance                   which would be viewed as
 that the avoided cost payments a
                                               More recently, the Commis-                                                             attractive private invest-
 QF receives from the utility will
                                         sion went a step further and esta-                                                           ments under competitive
 fall below debt service obligations.
                                         blished guidelines for the develop-                                                          market conditions. The
 The effect of all these "market
                                         ment of a number of standardized                                                             newness of alternative
 failures" is that developers may not
                                         contracts which the state's regu-                                                            energy technologies, the
 be able to secure adequate financing
                                         lated utilities were then required to                                                        regulatory        uncertainty,
 if utilities' avoided cost payments
 are allowed to vary over the life of    offer to QFs. That decision was                                                             and other development
                                         the Commission's first step towards                                                          barriers complicate the
 the project.
                                         implementing the Order Instituting                                                          market for small power
        Unfortunately, avoided costs     Rulemaking #2 (OIR 2), .which                                                               facilities. Regulation may
 are certain to fluctuate over a         was issued by the PUC in January                                                            be required to mitigate
  project's life since they are based    of 1982.                                                                                    these problems.
                                                                                             standards. If the QF             2. Establish contract options
 on the changing costs of a utility's                                                        exceeds     the     utility
  fuel supplies and of projected addi-         OIR 2 established guidelines                                                         which do not redistribute
                                                                                             industry's    performance
 tions to its capital plant. Numerous    for four "standard offer contracts'                                                         risk without adequate
                                                                                            standards, it will qualify
 contract terms may be devised,          and for policies regarding project-                                                        compensation.            Policies
                                                                                            for higher capacity pay-
 however, to ease the effect of this     specific contracts which are indivi-                                                       which       provide        better
                                                                                             ments.
 condition on financing attractive-      dually negotiated between the utili-                                                       financing        opportunities
 ness. For example, "levelized" pay-                                                        By choosing this option,                simultaneously          redistri-
                                         ties and developers. The provisions
 ments guarantee a price per             of the four standard offer contracts               the QF qualifies for a                  bute the risk of invest-
                                         are:                                               levelized capacity payment              ment.        For       example,
 kilowatt hour of energy delivered
 for some specified length of time,                                                         schedule. Levelized pay-                levelized              payment
 with early payments which exceed                                                           ments are calculated by                schedules result in over-
 avoided costs being offset by later                                                        estimating the total value             payments in the early
                                             I.    Short Term As-Available                  of the QF's production
 payments which are below avoided                                                                                                  years of a contract which
                                                   Contract. Facilities pro-                over the contract period,
cost. In the long run, the sum of                  viding utilities with "non-                                                     are to be made up for in
 all the payments is equal to the                                                           and then spreading this                 later years. Utilites are
                                                   firm" power receive full                 total value based on full
 total avoided costs or some percen-                                                                                               obviously taking on some
                                                   avoided energy and capa-                 avoided costs out over
 tage of them. Another option is                   city payments which vary                                                        additional risk in this case
 loan guarantees that secure indebt-                                                        that period through aver-              because of the possibility
                                                   by time of delivery.                    age payments. Under this
edness in the event of project                     Non-firm means the QF is                                                        that the QF will stop pro-
failure. Alternatively, price "floors"                                                      option, capacity payments              ducing power before the
                                                   not bound to deliver                    are based on the short run
insure that the avoided coat pay-                                                                                                  initial period of overpay-
                                                   power at any particular                 costs of the utility as
ments will not slip below a nego-                                                                                                  ments is made up for.
                                                   time of day or season, so               defined above. The level-
tiated level.                                                                                                                      Compensation for early
                                                   the utility cannot rely on              ized payment period may                 risk could take the form
                                                  it for peak demand                       extend for up to 30 years.
      These provisions and others                                                                                                  of discounts from full
                                                  periods. However, if the
can encourage QF development                                                                                                      avoided costs or some
because they reduce the investment                QF does provide power                                                           other offsetting contract
                                                  during periods of high             4.       Long Term Contract for
uncertainties faced by lenders.                                                               Energy and Capacity. QFs             term.
                                                  demand the utility must
They also, however, may redistri-                                                            which enter into long           3.    Avoid a situation where
                                                  pay a higher price than
bute financial risk from the project                                                          term contracts for firm             ratepayers or utilit stock-
                                                  that paid for power
developers to the utilities' stock-                                                          capacity may qualify for             holders subsidize               OF
                                                  delivered during other
holders or ratepayers. This prob-                 periods.                                    payments based on long              development. Over the
lem must be taken into account by                                                            run avoided costs of                 term of a contract, total
state regulators who have the power               Capacity payments are                      energy and capacity. Util-           energy and capacity pay-
to require utilities to offer contract            based on the utility's                     ity calculations are to be           ments to QFs should not
terms which enhance financing                     short run avoided cost                      based on the costs of                              the       utilities'
                                                                                                                                  exceed
opportunities, either through "stan-              reflecting the cost of a gas               additional power genera-             avoided costs. Subsidies
dard offers or through a process of               turbine plant. A capacity                   tion projects in their              to QFs would distort
negotiation between the utility and               payment is offered, even                   resource plans, but the
                                                  though supplies are non-                                                        investment choices and
the developer. Standard offers are                                                           details of these contracts          could place unfair burdens
created through a process of                      firm,     because     it is                 have yet to be worked out          on ratepayers or stock-
rulemaking at the PUC, and must                   assumed that the aggre-                     by the utilities.                  holders in the short term.
be offered to QFs by the utilities.               gate reliability and value
                                                  of the small power system              The Commission also granted         4. Encourage the utilities to
Negotiated contracts deviate from                                                 utilities the discretion to submit
standard offers, and may be tailored              exceeds the sum of indi-                                                       use their expertise and
                                                  vidual units' production.       individually negotiated contracts for          financial strength to aid
to the particular needs of the                                                    CPUC review as they are signed,
developer. If a QF seeks a nego-                  Avoided cost payments                                                          small power development.
                                                  are calculated at the time     although the Commission did                     Utilities have engineering,
tiated contract, the utility must bar-                                           discourage regular use of this
gain in good faith. The following                 power is received by the                                                       managerial and financial
                                                  utility, and will therefore    option. The utility is more assured             expertise which are valu-
section contains a summary of the                                                of recovering all contract costs
contracting policies adopted by the               vary over the life of the                                                      able assets for developing
                                                  contract.                      through its rate base if the Com-               an efficient small power
PUC.                                                                             mission has approved the contract.              system.         Most utilities
                                                                                 If the utility chooses not to acquire           also have access to rela-
                                            2.    As-Available     Contract      advance approval, it is at risk for             tively inexpensive credit.
   Summary of California Policy                                                  contract costs which may be con-
                                                  with Escalated Energy                                                          Regulators can induce the
                                                   Payment Option This con-      strued as unreasonable by the
                                                  tract provides payments        Commission in subsequent rate
     California policy makers have
generally supported small power                   for non-firm energy sup-       proceedings.                                         (Se SMALL POWER. page 6)
                              6Al                                                                                                   Kc,
                                                   automatically guarantee that the             signed a number of negotiated con-
   Small Power                                      utilities' contract costs would be           tracts in 1982 without Commission
                                                                                                                                                Hopefully, the prospects for
                                                                                                                                          small power project development
   (continued from page 5)                          passed through to rates. The suc-           approval, thus expediting the pro-        will be enhanced as the economy
                                                   cess of the pre-approval policy that         cess. Under such circumstances, a         recovers, and as the success of a
                utilities to put these assets      was adopted will depend largely on           remaining concern is that utilities       few     early   ventures     instills
               to work with 1) standards           the willingness of the utilities to          bargain in good faith with QFs. It        confidence in the investment com-
               which tie utilities' regu-          negotiate and to accurately and              appears that the PUC will be watch-       munity. In the meantime, state
               lated rates of return to            fairly assess the technological and          ing the utilities for signs of unfair    policy makers will need to continue
               evidence of good faith              financial risks of QFs. Ultimately,          bargaining, and that it will respond     to pursue policies which can lead to
               efforts to encourage small         its success may depend on whether            accordingly.     The PUC docked           optimal small power development,
               power development; 2)              the utilities are willing to sign a          Southern California Edison's return       which will provide Investors with
               guarantees that contracted         contract before the PUC approves             on equity 25 basis points in              the confidence that the market does
               expenses will be passed            it. If utilities require Commission          December of 1982 because the              not yet provide, and which will at
               through to ratepayers; and         approval beforehand, the ensuing             PUC concluded that the utility            the same time balance their
              3) rewards to the utilities         long and expensive regulatory pro-           lacked vigor in its promotion of          interests with those of the state's
              implemented through the             cess may discourage otherwise                small power development.                  energy consumers.
              rate base or through some           attractive projects.                                On the other hand, avoided
              other regulatory mechan-                    In spite of these disappoint-       cost calculations for California
              ism.       Generally, some          ments, developers are likely to view         utilities decreased significantly dur-
              type of inducement is                                                            ing 1982, frustrating small power
              needed since a utility has                                                      developers.        The      oil    glut,        Volume 7, Number 2
              little incentive to promote                                                     correspondingly lower oil and gas
              the development of a sys-                                                       prices, and a good hydro year
                                                                                                                                              April 1983
              tem which complicates its                                                       lowered the utilities' avoided
             own operations and with                                                          energy costs. Erratic world fuel oil            ENVIRONS, a non-partisan envi-
             which it must compete.                                                           prices moved Southern California                ronmentallawnaturaI resources
                                                                                                                                                                          nws-
       S. Avoid unnecessary reguLa-                                                           Edison to announce that it would                letter published by King Hall School
             t         involvement. The                                                       not enter into negotiated contract              of Law, and edited by the Eni.
                                                                                                                                              ronmental Law Society. University
             more          regulators     are                                                obligations which include levelized              of California, Davis.
             involved in the contract-                                                       payments or floor prices because of                 Designation of the employer or
             ing process, the more                                                           the difficulty of estimating future              other affiliation of the author(s) of
            expensive and time con-                                                          avoided costs.                                   any article is given for purposes of
                                                                                                                                              identification of the author(s) only.
            suming           the      process                                                         During 1982, the PUC contin-            The views expressed herein are those
            becomes for developers.               California's policies favorably when       ued to investigate methodologies                 of the authors, and do not necessarily
            Requiring pre-approval of             they are compared to those adopted         for calculating avoided costs and                reflect position of the University
                                                                                                                                                      the
            all negotiated contracts,                                                                                                         of California, School of Law, Env-
                                                  by the regulatory agencies of other        the contract terms included in the               ronmental Law Society, or of any
            for example, could add               states. No other state has devoted         utilities' proposed standard offers.           employer or organization with which
            significantly to the cost of         so much attention to the details of        More hearings are planned for 1983             an author is affiliated.
            project development.                 utility contracts on behalf of             to establish the terms of the utili-                Submission of Comments, Letters
        Given this list of policy cri-            developers. In fact, many states do       ties' long term contracts. The reso-           to the Editor. and Articles is en-
 teria, and given regulators' inex-               not require utilities' contracts with                                                                         the
                                                                                                                                           couraged. We reserve right to edit
                                                                                            lution of these matters should pro-            and or print these materials.
 perience with small power produc-               small power facilities to conform to       vide more certainty for developers
 tion in general, it is not surprising           any adopted rules or guidelines.           and lenders.
 that      the          Public      Utilities    Many leave it to the utilities to esti-
 Commission's OIR 2 policies have                mate avoided costs rather tqan                                                            Editorial Staff
                                                                                                         Conclusion
 turned out to be conservative from              using the California approach of                                                          Editor-in-Chief
 the standpoint of developers.                   developing     assumptions       under                                                    LauraKosloff
                                                 which avoided cost calculations are                  PURPA and OIR 2 signal a             Managing Editors
                                                 made. Because of the PUC's atten-              change in how and by whom energy          Jerry Hobrecht
                                                 tion to these matters, developers              will be produced. State and federal       Mark Trexler
     Assessm'ent of PUC Policies                                                                policy makers have taken steps to
   from the Developers' Standpoint               are likely to choose California sites                                                    Editors
                                                 over those in other states, when               induce the development of an              Hugh Barroll
                                                 they have that choice.                        energy system which will include           Jamie Kerr
                                                                                               unregulated production by relatively       Clancy Nixon
         The terms of the standard                                                             new technologies. The risks of
                                                                                               creating such a system are                 Production Managers
   offer contracts have not received                   The State of the World                                                             Lynn Hutcldns
   rave reviews from developers.                           Since OIR 2                         significant, but appear reasonable
                                                                                               compared to conventional alterna-          Jim Laughlin
  Those contracts are unlikely to
  enhance financing opportunities of                                                           tives.                                     Art
  developers unless their projects use                 Since the Commission issued                    Although      recently-adopted      D. Hanlon
   well-developed technologies so that           the first OIR 2 decision in January           policies may give developers new           Staff
  investors can provide lenders with             of 1982, the prospects for small             incentives,      institutional     and      Elliot Block
  evidence of past success, unless the           power developers appear somewhat             economic uncertainty remains. The           Donna Bronski
  projects are capable of producing              brighter. The PUC approved a 30              political preferences of state and          MarciBurkel
  highly controllable output, or                 year negotiated contract between             federal      administrations     could      Gerri Carr
  unless they are backed by other                U.S. Windpower and PGandE in                 threaten guarantees provided by            Laurie Davis
  sources of income or large equity              April of 1982. Briefly, the contract        current policies, a possibility which       Allen Ginsborg
  contributions.     The       levelized         provides that payments to U.S.              will be of foremost concern to              Martha Lennihan
 payment option is available only to             Windpower will not fall below a             investors. The PUC's pricing poli-          Norine Marks
 projects which have predictably                 negotiated price per kilowatt hour          cies, however, appear secure for the        Adam Rosen
 high      performance       standards.          of energy supplied to PGandE.               time being. They were adopted by            Fern Shepard
 Furthermore, it is only the capacity            PGandE's ratepayers are compen-             Brown Administration appointees to          Nancy Simel
 payments that are levelized, and               sated for promising a guaranteed             the PUC who favor alternative               Sandy Spellisy
 they represent only a small portion             price floor with a discount from            power development. Over the next            Maureen Summers
of total QF income. Escalation,                 actual avoided costs. Overpay-              few years, however, these policies           Faculty Adviser
although an option available to all             ments to U.S. Windpower which               could be jeopardized by the legisla-         Harrison C. Dunning
QFs, is offered over a time period              accrue in the "bad" years are repaid         tive preferences and political
that may be too short to help                   to PGandE with interest in the              appointments of the Deukmejian
developers match income streams                 .good" years, when avoided costs            Administration, which has already
to debt service obligations. Because            are high. Unfortunately, it took            promised to reduce funding for the
of the shortcomings of the standard             five months for PGandE and U.S.             development of alternatives to cen-          Ar    153. Co[rt    t5's,,,el
offer contracts, many developers                Windpower to obtain regulatory              tral system power generation.
will opt to negotiate individual con-           approval of the contract.                            The cost of financing small                 and
                                                                                                                                          Design jobcoordination byRobert
tracts in order to secure financing.                  More recently, there are signs       power projects is still high, and the          Maddock.  Publicatiom. Layoutandsome
        The PUC's policy on nego-               that some utilities will not choose        level of future avoided costs seems                                        UC
                                                                                                                                         typeseting by Repro Graphics. DasiL
tiated contracts is also a disappoint-          to seek approval by the PUC before         increasingly unpredictable because
ment to developers, for they had                allowing contracts with QFs to take        of the volatility of the world energy
hoped that the PUC would                        effect. Southern California Edison         market.

								
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